Finance

Investing Money in Stocks: Tips for Beginners

Many Germans prefer to keep their hands off stocks. But if you want to increase your wealth in the long term, you can hardly avoid it. What should beginners know?

Long gone are the days when you could save yourself rich thanks to high interest rates. If you want to get more out of your money, there is often only one option left: invest. At least that’s what experts advise.

But when it comes to stocks, many Germans still shy away from it. Too risky, some think, too complicated, others. Even as a beginner – and without a large amount of assets – you can invest in stocks relatively easily. If you follow some tips.

Take it easy

Just because you’re reading here that it is smart to invest in stocks doesn’t mean you should buy blindly. First of all, you should acquire the knowledge you need to understand what you are doing – and what your goal is.

These pieces give you a good overview:

Know your status quo

How much wealth do you actually own? Are you in debt? How much money is left over each month? What are you currently doing with this money? Before you go public, you should first take an inventory.

You can only plan your next steps if you know where you currently stand. You don’t need any complicated tools for this, just simply: paper and pen.

Lay the foundation

The installments for your television or car have not yet been paid off? Then that should be your priority first. Is your nest egg still rather puny? Then, as an exception, you first have to save, even if there is little or no interest. The rule of thumb here is at least three net salaries. If this safety cushion is in place, you can start investing.

Know your goal

Make it clear what you want to invest the money for. Would you like to make provisions for old age? Or do you need it in the near future? If the latter is the case, stocks are actually not the right choice. You should only invest money that you don’t really need.

Understand the products

You shouldn’t buy anything that you don’t see through. You should be familiar with these financial products:

Single shares: This is arguably the product most people think of when they talk about “stocks”. When you buy individual stocks, you are buying shares in a company. You appear, so to speak, as an investor for this company – in the hope that the company’s share will be worth more in the future.

In return, the company pays you a dividend every year. Just as it would pay interest to the bank if it had borrowed from the stock instead of your investment to raise money.

However, it is also possible that companies do not pay dividends – which can also make perfect sense. For example, if the company is in a growth sector and reinvested the profits or wants to build up a reserve.

Actively managed equity funds: Here you can buy a whole basket of stocks. This has the advantage that you spread your risk more widely than if you were to bet everything on a company with a single share. A fund manager will decide for you which companies are included in which shares. In turn, his services naturally cost a little, which is why actively managed funds are relatively expensive.

ETF: They are, so to speak, the counterpart to active funds. You invest passively with ETFs (Exchange Traded Funds). The product is also called an index fund because a computer algorithm tracks a stock index. For example, there are ETFs that map the Dax, the German share index.

The Dax itself shows the development of the companies it contains. An ETF on the Dax, in turn, contains exactly the same number of shares in exactly the same companies as the Dax, which is why it is developing in exactly the same way. An ETF is also a mixture of many stocks – with the advantage of lower fees because no fund manager has to be paid.

Know your risk tolerance

You have understood the advantages and disadvantages of the various financial products, you know the purpose for which you want to increase your money – the question remains, how much risk you are willing to take.

There is no return, known as a return, without risk. Therefore, you should be clear about the degree of risk to which you can still sleep soundly.

That depends, for example, on how high and secure your income is, whether other people are dependent on you or how nervous and stress-resistant you are in general.

There is no point in investing if you panic at the first crisis and sell quickly. Because it is certain that crises will keep coming.

Choose your strategy

There is no single silver bullet that works equally well for every investor. It is important that the product fits your goal and your risk tolerance. For example, if you want to make provisions for old age – i.e. build up assets over the long term – ETFs are a good choice. The situation is different if you want to get more money in the short term.

Think about taxes

What many do not know: You have to pay tax on income from shares. They are subject to the so-called final withholding tax of 25 percent – plus solidarity surcharge and possibly church tax. The tax is withheld directly by your depository provider or your bank and paid to the tax office – unless you submit an exemption order.

Personal-Financial.com income is tax-free up to an amount of 801 euros per year. Only on winnings that exceed this allowance, the saver lump sum, exceed the withholding tax. If you have not yet fully exhausted the 801 euros with your exemption order, you can subsequently recover the taxes you paid too much using your tax return.

Since 2018, taxes have not only been incurred on distributing financial products, but also on accumulating financial products – for example, on funds in which the income is automatically reinvested.

Don’t trust any secret tips

Whenever someone says they would make a fortune with a particular stock: don’t trust them blindly! Nobody can predict with certainty how the markets will develop – not even self-appointed stock market gurus. Of course, this does not rule out that some stock tips can still work, but that’s more luck than ability.

One reason for this is the so-called information efficiency of the capital markets. It means that all publicly available information is already reflected in share prices and prices. A forecast based on this information is therefore never more reliable than chance.

Benefit from the compound interest effect

Many investors underestimate it, but it is immensely important for building wealth: the compound interest effect. With it you let your money work for you – because you get interest on interest.

In order to benefit from the effect as best as possible, you should reinvest all interest directly instead of having it paid out. This also applies to dividends. So, year after year, an ever-increasing amount of income is earned, which brings you enormous gains, especially in the long term.

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